Benefits

• Strategic default could let you keep your home at a much lower interest rate, or take thousands of dollars off your mortgage. The standard strategic default plan involves the homeowner purposely missing payments and then asking the lender for loan modification. The lender might fear a foreclosure -- in some states lenders cannot go after any money owed after a foreclosure sale -- and offer to lower the interest rate on the loan or even forgive some of the principal and refinance the mortgage.
  
  

Disadvantages

• Voluntarily defaulting on a second home does not necessarily preclude the lender from forcing foreclosure. The creditor may feel that it profits more from a foreclosure sale than modifying your loan. Also, strategic default might still result in an underwater loan -- one in which you owe more on the mortgage than the value of the home -- if the value of the home continues to fall. Foreclosure absolves your liability for the home once and for all.
  
  

Danger

• In both cases, you risk the lender forcing the sale of the home and still owing money on the mortgage. If you live in recourse state, where the lender can sue you if a foreclosure sale does not satisfy the loan, the lender can go after your other assets, such as your primary residence. In general, non-recourse states protect only primary residences, so you may have a deficiency balance on the foreclosed second home if it was an investment or rental property. Also, non-recourse states tend not to protect homes that have been refinanced. You also may owe capital gains on the sale of the second home, even with a deficiency balance. For example, say you bought a $150,000 home that is now worth $180,000, but you owe $200,000 on the mortgage. You would have a capital gains of $30,000 after a foreclosure sale.
  
  

Tip

• A foreclosure or late payment from strategic default affects your credit score for seven years, which might mean a creditor will reject your application for a future mortgage or make the loan more expensive through a higher interest rate. You might want to consult a mortgage expert or attorney to determine if you have a recourse or non-recourse loan. You could contact your lender about loan modification that avoids the risks of foreclosure or strategic default. For instance, if the second home counts as a primary residence, you might qualify for a federal Making Home Affordable program, such as a short refinance, which forgives some of your mortgage and lets you keep the home.